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Thomas,  Samuel  Evelyn 
The  Macmillan  report 



A  Short  Summary  of  its  Main  Points 


S.  EVELYN  THOMAS,  B.Com.  (Lond.),  Cert.  A.I.B., 

With  the  Compliments  of  the 


LONDON  OFFICE  AND  LECTURE  ROOMS      -      40-42,  Queen  Victoria  St.,  E.G.  4. 
MANCHESTER  OFFICE  AND  LECTURE  ROOMS        -          -         21.  Spring  Gardens. 


For  some  years  past  there  has  been  growing  support  for  the  view 
that  the  present  conditions  of  depression  in  this  country  are  largely  due 
to  the  faulty  organisation  of  our  banking  and  credit  system  and  to  the 
monetary  policy  pursued  by  the  authorities  during  the  last  decade. 

Accordingly,  in  November,  1929,  the  Government  set  up  a  Committee 
of  economists  and  business  men,  under  the  Chairmanship  of  Lord 
Macmillan,  "  to  enquire  into  banking,  finance  and  credit,  ....  and  to 
make  recommendations  calculated  to  enable  these  agencies  to  promote 
the  development  of  trade  and  commerce  and  the  employment  of 
labour  ". 

After  many  months  of  exhaustive  investigation,  during  which  a  large 
number  of  witnesses  from  banking,  commercial,  industrial,  professional 
and  academic  circles  were  examined,  the  Committee  issued  its  Report, 
Cmd.  3897,  dated  July,  1931. 

Part  I  of  the  Report  is  devoted  to  an  historical  survey  of  the  banking 
and  monetary  systems  here  and  abroad  ;  the  international  gold 
standard,  its  functions,  objectives  and  conditions ;  the  economic 
position  of  Britain  ;  developments  in  the  economic  situation  since 
1925  ;  the  fall  in  world  prices  and  the  influence  of  monetary  policy 
on  the  price  level. 

Part  H,  with  which  we  are  primarily  concerned,  contains  a  number 
jd  recommendations  whose  main  purport  should  be 




The  Committee  points  out  that  the  present  troubles  of  this  country 
arc  neither  wholly  domestic  nor  wholly  international  in  character. 
The  recent  increase  in  unemployment  is,  it  is  true,  due  in  the  main  to 
the  "  world  depression  "  ;  but  before  the  world  depression  we  had  a 
domestic  problem  of  over  a  million  unemployed  ;  and  even  after  the 
troubles  of  the  world  as  a  whole  are  redressed  it  would  appear  that  the 
domestic  problem  is  likely  to  remain.  The  Committee  hence  found  it 
necessary  to  consider  proposals  relating  to  both  international  and 
domestic  monetary  policy. 


Britain  has  necessarily  suffered  severely  from  the  depressed  inter- 
national situation  because  of  her  markedly  "  open  "  position,  i.e.,  her 
extreme  dependence  on  foreign  trade,  on  her  income  from  foreign 
investments  and  on  her  profits  as  international  banker,  merchant  and 
financier.  In  such  circumstances,  the  disequilibrium  associated  with 
prolonged  unemployment  may  be  due  to  any  of  three  factors  :  (a)  that 


in  this  country  selling  prices  do  not  adequately  cover  costs  of  production ; 
(b)  that  similar  conditions  exist  throughout  the  world  ;  and  (c)  that  our 
costs  of  production  are  above  those  of  our  competitors. 

The  Committee  attributes  our  unemployment  mainly  to  the  first  and 
third  of  these,  and  expresses  the  opinion  that  the  disparity  between  our 
costs  and  those  of  our  competitors  is  due  not  so  much  to  the  inefficiency 
of  our  industries  as  to  the  fact  that  sterling  costs  of  production  did  not 
adjust  themselves  to  the  rise  in  the  value  of  sterling  which  was 
involved  by  our  return  to  the  gold  standard.  The  effect  of  this  lack 
of  adjustment  has  been  intensified  by  the  world-wide  collapse  in 
prices,  and  because,  though  our  export  industries  have  reduced  their 
own  costs,  that  reduction  has  been  nullified  by  an  increase  in  the 
costs  of  "  sheltered  "  services,  such  as  transport,  which  enter  into  the 
prices  of  all  our  products. 




After  its  exhaustive  review  in  Part  I  of  the  Report  of  the  working 
of  the  gold  standard,  both  national  and  international,  the  Committee 
expresses  the  opinion  that,  so  far  as  this  country  is  concerned,  the 
sacrifices  involved  in  returning  to  the  gold  standard  at  the  pre-war 
parity  have  not  been  justified  by  the  anticipated  advantages  of  external 
price  stability. 

Difficulties  in  the  Operation  of  the  Gold  Standard. 

(1)  The  effects  of  the  re-adoption  of  the  gold  standard  in  different 
countries   varied.     In   Great    Britain    our  policy  of  deflation 
meant   that  the   existing   level  of  sterling  incomes  and  costs 
was  relatively  too  high  in  terms  of  gold.     This  necessitated 
a   downward   adjustment,    pending   which  industries  subject 
to   foreign  competition  were  at  a  disadvantage.     In   France 
and    Belgium,    the    policy  of  devaluation    gave  an  artificial 
advantage  to  export  industries,   pending  an  upward  adjust- 
ment of  costs. 

(2)  International  lending  power  has  been  re-distributed,  largely  as 
a  result  of  the  character  of  the  final  settlement  of  the  War 
debts,  by  which  Britain  resigned  her  own  net  creditor  claims 
in  favour  of  France  and  the  United  States.     Consequently, 
the  surplus  available  for  lending  has  relatively  increased  in 
the  latter  two  countries  while  Great  Britain  has  a  smaller 
surplus,  further  reduced  since  1925  by  the  adverse  effect  of 
the  return  to  gold  on  her  visible  balance  of  trade.     Instead  of 
using  their  receipts  as  Great  Britain  used  hers,  in  increasing 
imports   or  in   making   additional   long   term   foreign   loans, 
these  two  countries  have  required  payment  of  a  large  part 
of  their  surplus  either  in  gold  or  in  short-term  liquid  claims. 


This  position  can  only  be  temporary,  since  if  a  creditor 
country  is  unwilling  to  lend  its  surplus,  its  own  export  trade 
must  be  destroyed  through  the  relative  reduction  in  the  gold 
costs  of  other  countries.  This  effect  has  been  delayed  by  the 
sterilisation  of  gold  imports  in  the  creditor  countries,  France 
and  U.S.A.,  and  by  the  inelasticity  of  wages  and  other  costs 
in  the  debtor  countries. 

The  Committee  concludes,  however,  that  the  promise  of  international 
co-operation  and  the  dependence  of  this  country  on  overseas  trade 
and  on  invisible  exports  make  it  desirable  that  we  should  maintain 
the  gold  standard  at  the  present  parity. 


The  fall  in  wholesale  commodity  prices  has  adversely  affected  share- 
holders and  entrepreneurs  and  has  led  to  an  increase  in  unemployment. 
A  rise  in  prices,  however,  would  transfer  purchasing  power  from  those 
in  receipt  of  fixed  incomes  to  the  shareholder  and  entrepreneur  and 
those  whose  employment  is  increased.  Moreover,  it  would  lead  to 
a  decrease  in  the  burden  of  war  debts. 

Hence,  the  Committee  concludes  that  the  International  Price  Level 
should  be  forced  up  to  the  1928  level  by  the  Bank  of  England  and 
other  central  banks  working  in  the  closest  co-operation.  Although  this 
clearly  involves  a  system  of  international  currency  management,  and 
manifold  difficulties  which  only  experience  can  solve,  it  should, 
nevertheless,  be  "  the  prime  object  of  international  statesmanship  "  to- 
attain  the  new  level  of  prices  and,  having  achieved  it,  to  maintain  it 
with  as  much  stability  as  possible. 


"  The  monetary  system  of  this  country  must  be  a  Managed 
System  ".  The  main  objects  of  a  sound  monetary  policy — (a) 
maintenance  of  the  parity  of  the  foreign  exchanges  ;  (ft)  the  avoidance 
of  the  Credit  Cycle  ;  and  (c)  the  stability  of  the  price  level — cannot  be 
achieved  automatically,  as  was  thought  to  be  the  case  under  the  old  gold 
standard.  They  require  the  constant  exercise  of  knowledge  and 
judgment  by  an  institution  of  ripe  experience,  great  resources  and 
unchallengeable  authority.  Hence — 

The  managing  authority   should   be  the   Bank   of  England ,. 

"  an  excellent  instrument  for  the  purpose  ;  independent  of  political 
influences,  yet  functioning  solely  in  the  public  interest  ;  with  long 
traditions  and  experience  and  clothed  with  vast  prestige,  yet  not 
distrustful  ....  of  evolutionary  change  or  hesitant  of  new  respon- 
sibilities ".  The  Committee  suggests  that  the  Bank  of  England  should 
endeavour  to  promote  the  stability  of  output  and  of  employment 
at  a  high  level  by  influencing  the  regular  flow  of  savings  into  investment 
at  home  and  abroad.  The  banking  system  can  supply  short-term  loans 
but  funds  for  long-period  investment  must  be  provided  from  sources 
outside  the  banking  system.  The  machinery  of  investment  must  be 
so  adjusted  that  a  proper  balance  shall  exist  between  facilities  for 
domestic  and  foreign  borrowers. 



In  brief,  the  Committee  concludes  that  the  objectives  of  our  monetary 
policy  should  be  :  (a)  to  adhere  to  the  gold  standard  at  the  existing 
parity  ;  (b)  to  use  our  influence  to  raise  the  international  price  level, 
i.e.,  to  lower  the  value  of  gold  ;  and  (c)  to  maintain  the  stability  of 
national  and  international  prices  at  the  new  level.  Thus  'both 
permanent  and  temporary  measures  are  called  for. 


Stability  of  international  prices  over  long  and  short  periods  can  be 
maintained  only  by  co-operation  among  central  banks.  Over  long 
periods  stability  is  largely  a  question  of  gold  reserves  in  relation  to 
credit.  Stability  over  short  periods  in  order  to  mitigate  the  Credit 
Cycle  is  a  question  of  co-operative  monetary  management. 

Central  Bank  Reserves. 

The  problem  of  the  inadequacy  of  the  world's  gold  stocks  and  future 
gold  supplies  is  not  regarded  as  immediately  pressing,  particularly  as 
gold  currencies  no  longer  circulate  and  gold  stocks  are  concentrated 
in  the  reserves  of  the  central  banks. 

The  sole  use  of  gold  reserves  to-day  is  to  enable  a  country  to  meet 
temporary  deficits  in  its  international  balance  of  payments.  Yet  in 
many  countries  legislation  fixes  a  definite  proportion  between  the  total 
reserves  of  gold  or  foreign  gold  exchange  and  the  volume  of  notes 
issued  by  the  Central  Bank.  Such  a  basis  is  now  almost  meaningless 
and  has  the  effect  of  forcing  a  drastic  restriction  of  credit  whenever 
the  reserve  approaches  the  legal  minimum.  Greater  freedom  in 
the  use  of  Central  Bank  reserves  is,  therefore,  desirable. 


The  Committee  endorses  the  views  expressed  in  the  second  interim 
Report  of  the  Gold  Delegation  of  the  Financial  Committee  of  the 
League  of  Nations  and  suggests  the  following  principles  for  the  guidance 
of  central  banks  generally  : 

(1)  Gold  standard  countries  should  agree  not  to  allow  gold  coins 
or  gold  certificates  to  pass  into  circulation. 

(2)  Central  banks  should  collectively  consider  whether  national 
legal  requirements  as  to  gold  reserves  should  be  relaxed  or 
tightened.     At   the   present   time   they   should   probably   be 

(3)  Central  banks  should  be  permitted,  at  their  discretion,  to  regard 
balances  with  central  banks  in  other  gold  standard  countries 
or    with    the    Bank    for    International    Settlements    as    the 
equivalent  of  gold  for  all  purposes. 

(4)  Central  banks  must  not  be  unduly  limited  in  their  power  to 
expand  credit  without  a  corresponding  increase  in  their  gold 
holdings,  or  to  restrict  credit  otherwise  than  by  a  restriction 
of  such  holdings. 

In  this  way,  the  available  quantity  of  monetary  gold  would  not 
limit  the  available  supplies  of  currency  and  bank  credit,  and  conse- 
quently need  not  affect  general  price  levels. 


Obstacles  facing  Central  Banks. 

(1)  Non-monetary  causes  of  instability  nullifying  effective  con- 
trol,   e.g.,    political   troubles,  war  debts,  seasonal  variations, 
changes  in  tariffs,  in  fashion  and  in  demand,  over-borrowing 
by  some  countries  and  over-lending  by  others,   rigidity  of 
economic  conditions  and   especially  of  costs   of  production, 
and  local  or  general  lack  of  confidence. 

(2)  Divergence  between  the  interests  of  their  own  country  and 
those  of  the  rest  of  the  world. 

(3)  Inadequate  control  over  the  monetary  machine  and  its  working. 
Neither  the  Federal  Reserve  system,  the  Bank  of  France  nor 
the  Reichsbank  has  as  complete  a  control  over  the  creation 
of  credit  in  their  respective  countries  as  has  the   Bank  of 
England,  whose  control,  within  the  limits  of  the  international 
standard,  is  "  remarkably  complete  ".     Nevertheless,  even  if 
the  central  bank  can  control  the  amount  of  money,  it  cannot 
control  the  uses  to  which  it  is  put.     This  is  the  sphere  of  the 
commercial  banks. 

Central  Bank  Control  over  Bank  Credit. 

A  central  bank  should  regulate  the  volume  and  price  of  bank  credit 
so  as  "  to  maintain  output  and  employment  at  the  maximum  compatible 
with  adherence  to  the  international  gold  standard  and  with  maintenance 
of  the  stability  of  the  international  price  level  ".  To  do  this,  it  must 
watch  not  only  "  the  short-money  market,  the  gold  movements  and 
the  pressure  on  the  exchange  and  conditions  abroad,  but  also  the 
internal  price  level,  the  unemployment  figures  and  the  capital  market". 
It  is  reiterated,  however,  that  owing  to  the  international  effects  of 
monetary  conditions,  effective  internal  control  can  be  achieved  only 
by  concerted  action  by  all  central  banks. 

Summary  of  Conclusions  Relative  to  Central  Banking  Policy. 

(1)  The  aim  of  central  banks  should  be  to  maintain  the  stability 
of  international  prices  over  both  long  and  short  periods. 

(2)  This  implies  the  regulation  of  the  volume  and  terms  of  bank 
credit  so  as  to  maintain  stability  in  the  rate  of  new  investment 
and  new  enterprise,  both  at  home  and  abroad. 

(3)  Central   banks   should   frequently   confer   to   decide   on    the 
general  tendency  of  their  individual  credit  policies,  without 
prejudice,    however,    to    the    individual    discretion    of    each 
institution  to  safeguard  its  national  interests  by  altering  its 
own  bank  rate,  or  by  attracting  or  discouraging  gold  imports. 

(4)  Whilst  each  central  bank  should  retain  complete  autonomy, 
it  should  aim  at  avoiding  unnecessary  imports  of  gold.     Its 
duty  should  be  to  prevent  unbalanced  internal  conditions 
from  creating  international  instability,  and,  to  this  end, 
it  should  endeavour  to  combat  any   national  tendency  to 
maintain  too  high  a  proportion  of  liquid  investments  or  to 
undertake  an  excessive  amount  of  long-term  lending. 


To  meet  the  present  emergency,  creditor  countries  which  have  been 
requiring  balances  to  be  paid  in  gold  or  short-term  liquid  claims  should 
be  induced  to  lend  their  surpluses  and  to  buy  goods.  Loans  should  be 


made  to  solvent  borrowers  to  finance  new  productive  enterprises  and 
should  be  made  either  to  foreign  borrowers  or  to  home  borrowers.  To 
this  end  central  banks  should  (a)  endeavour  to  remove  existing 
hindrances  to  foreign  lending,  and  (b)  maintain  cheap  credit  in  their 
money  markets.  It  is  essential  that  concerted  action  be  taken,  as 
increased  lending  or  buying  by  one  creditor  nation  might  result  in  the 
claims  against  it  being  used,  not  to  buy  more  goods,  but  to  meet 
the  demands  of  the  other  creditor  nations. 

The  task  is  two-fold  :  (a)  to  attract  borrowers  by  low  rates  of  interest 
on  long-term  loans,  and  (b)  to  remedy  the  shortage  of  sound  borrowers 
for  new  enterprise.  The  first  of  these  objects  may  be  attained  if  central 
banks  exert  their  influence  to  promote  public  confidence  in  the 
duration  of  low  short-term  rates,  and  to  lower  deposit  rates 
so  as  to  encourage  investment.  The  second  object  involves  some 
action  to  reinforce  the  credit  of  borrowers  and  so  overcome  the 
unwillingness  to  lend  which  has  followed  the  extensive  unwise  use  of 
borrowed  funds.  The  difficulty  might  be  overcome  by  some  form  of 
guaranteed  credit  under  a  state-aided  international  guarantee  fund  or 
by  the  establishment  of  a  powerful  international  financial  corporation 
to  safeguard  the  interests  of  investors  in  foreign  loans. 



The  volume  of  bank  deposits  has  now  a  more  important  influence  on 
monetary  conditions  than  has  the  volume  of  cash,  notes  being  used 
for  few  purposes  except  wage  payments  and  small  transactions.  Hence 
an  increase  in  the  active  note  issue  is  not  so  much  a  cause  as 
a  result  of  trade  activity,  this  activity  in  turn  being  traceable  to  an 
expansion  of  the  Bank's  deposits.  Yet  the  Bank  is  not  regulated  in 
respect  of  deposits.  This,  however,  is  to  the  advantage  of  central 
banking  operations.  What  is  required  is  more  elasticity  with  regard 
to  the  note  issue. 

The  provisions  made  by  the  Act  of  1928  are  inadequate,  for  the 
existence  of  a  fixed  fiduciary  issue  involves  the  immobilisation  of  gold 
for  export  purposes  to  the  extent  of  the  difference  between  the  fiduciary 
issue  and  the  actual  circulation.  Moreover,  an  approach  to  the 
Treasury  under  existing  provisions  for  powers  to  increase  the  note 
issue  may  be  interpreted  as  a  sign  of  weakness  and  give  rise  to 
undesirable  nervousness.  The  Bank  of  England  should,  therefore, 
have  greater  freedom  with  regard  to  its  reserves  and  should  be 
allowed  to  reckon  as  part  thereof  any  balances  held  by  it  with  the 
Bank  for  International  Settlements. 

Recommendations . 

(a)  Parliament  should  give  the    Bank  power  to  put  into  active 
circulation   notes   to   the   amount   of  £380,000,000   with   an 
absolute  maximum  of  £400,000,000.     Temporary  additional 
elasticity  to  be  provided  by  reference  to  the  Treasury. 

(b)  The  Bank  should  not  allow  its  gold  reserve  to  fall  below  (say) 
£75,000,000  except  temporarily  with  the  permission  of  the 
Treasury.     In   ordinary  circumstances  the   gold   should   not 
fall  so  low  as  this  statutory  minimum.     On  the  contrary, 
the  Committee  suggests  that  the  Bank's  normal  reserves  of 
gold  or  gold  exchange  should  be  increased. 


Separation  of  the  Departments. 

Although  the  separation  of  the  Departments  provides  a  convenient 
formula  for  dividing  the  profits  of  the  Bank  between  the  Bank  and  the 
Treasury',  it  has  not  been  satisfactory  from  any  other  aspect,  and  is 
confusing  and  misleading  to  other  than  experts.  The  Departments 
should  be  amalgamated  and  the  statements  in  the  Bank  Return 
amalgamated  without  preventing  the  calculation  of  the  division  of 
profits  as  before. 

Notes  in  Circulation. 

Of  the  "  notes  in  circulation  "  a  considerable  amount  is  held  by  the 
joint  stock  banks  as  till  money  ;  but  this  position  could  be  avoided  if 
the  banks  would  increase  their  deposits  at  the  Bank  of  England.  In 
this  way  the  amount  of  notes  stated  to  be  in  circulation  would  be 
reduced  to  a  figure  more  representative  of  notes  actually  in  circulation. 


Before  the  War  our  liquid  international  assets  consisted  mainly  of 
the  Bank  of  England's  gold  and  of  sterling  acceptances  on  foreign 
account.  These  were  at  least  equal  to  and  sometimes  in  excess  of  our 
short-term  international  liabilities.  In  recent  years,  however,  London 
has  conducted  a  vast  business  in  international  deposit  banking,  and 
her  liabilities  in  respect  of  short-term  bills  and  deposits  held  on 
foreign  account  greatly  exceed  her  claims  in  respect  of  accep- 
tances. At  the  same  time,  London  is  now  doing  a  larger  volume  of 
long-term  financing  than  is  justified  by  the  surplus  which  we  have 
available  for  long-term  overseas  investment,  with  the  result  that  we 
are  financing  long-term  foreign  loans  by  short-period  borrowing  in 
the  form  of  precarious  foreign  deposits,  which  can  be  retained  in 
London  only  at  the  cost  of  high  rates  of  interest.  In  brief,  our  position 
is  less  liquid. 

The  Bank  of  England's  liquid  assets  should,  therefore,  be 
substantially  increased  at  the  first  opportunity.  Bank  rate 
should  be  used  sparingly  when  the  object  is  merely  to  balance  moderate 
changes  in  the  short-term  position  by  attracting  foreign  funds.  It 
should  be  rightly  used  to  contract  credit  either  at  home  or  abroad. 

Temporary  contingencies  would  often  be  better  met  by  the  Bank 
relinquishing  its  own  liquid  assets.  For  this  reason,  fluctuations  in  the 
volume  of  assets  should  be  allowed  to  a  greater  extent  than  in  the  past 

Thus  the  Bank's  gold  reserves  should  be  allowed  to  fluctuate  between, 
say,  £175,000,000  and  £100,000,000,  and  they  should  be  supplemented 
by  liquid  resources  up  to  £50,000,000  held  in  foreign  centres  and  with 
the  Bank  for  International  Settlements. 


The  chief  means  by  which  the  Bank  manages  the  monetary  system 
are : — 

(1)  The  official  bank  rate. 

(2)  Open  market  operations,  e.g.,  the  sale  of  securities,  which  result 
in  a  change  in  the  aggregate  amount  of  the  Bank's  private 

(3)  Open  market  operations  which  may  consist  of  changes  in  the 
form  of  the  Bank's  assets  but  not  necessarily  their  volume. 
They  may  take  three  forms  : — 


(a)  Purchasing  and  selling  securities  to  offset  gold  movements 
(6)   Buying  long-dated  securities  (Consols)  and  selling  short- 
dated  securities  (Treasury  Bills). 

(c)  Forcing  the  market  to  discount  or  obtain  advances  at  the 
official  rates,  with  the  object  of  bringing  market  rates 
into  closer  conformity  with  these,  by  selling  securities. 

(4)  Adoption  of  technical  devices  for  directly  influencing  foreign 
exchanges,  e.g.,  sales  or  purchases  of  foreign  balances   (gold 
exchange  methods)  dealings  in  forward  exchange,  and  small 
variations  in  the  Bank's  buying  price  for  gold. 

(5)  Personal  influence  or  advice  to  prominent  elements  in  the 
money  market. 

In  regard  to  (1),  the  Committee's  views,  as  stated  above,  are  that  it 
should  be  used  sparingly. 

The  success  which  in  the  past  has  attended  the  Bank's  open  market 
operations  is  in  itself  a  justification  for  their  development,  but  in 
regard  to  (2)  above,  the  Bank's  position  could  be  strengthened  if 
it  were  afforded  more  detailed  information  respecting  the 
nature  and  extent  of  the  cash  holdings  and  deposits  of  the  joint 
stock  banks,  and  if  there  were  closer  collaboration  between  the  Bank 
and  the  joint  stock  institutions. 


The  published  reserves  of  the  clearing  banks  show  a  figure  of  about 
10-5  per  cent,  of  the  deposits,  comprising  6  per  cent,  in  cash  and  4'5  per 
cent,  in  balances  with  the  Bank  of  England.  But  this  latter  figure  is 
higher  than  is  actually  the  case  from  day  to  day,  for  the  averages 
are  not  daily  averages  but  relate  to  particular  days,  when  the  reserves 
are  inflated  by  "  window  dressing  ".  The  Committee  recommends 
that  the  process  of  window  dressing  be  abandoned  and  that  the 
London  clearing  banks  should  keep  a  daily  average  of  cash, 
in  bank  notes  and  balances  with  the  Bank  of  England,  of  not 
less  than  10  per  cent,  of  their  deposits.  This  would  involve  their 
keeping  larger  reserves. 

A  further  recommendation  was  that  returns  by  the  joint-stock  banks 
should  be  more  informative. 

Banks  other  than  the  clearing  banks  should  also  increase  their  liquid 
reserves  to  a  proportion  to  be  determined  in  each  case  after  consultation 
with  the  Bank  of  England. 

If,  following  frequent  and  regular  meetings  with  the  Bank  of  England, 
the  banks  would  from  time  to  time  accept  the  Bank  of  England's  advice 
as  to  the  average  figure  at  which  to  keep  their  reserves,  it  is  possible 
that  the  relaxation  or  tightening  up  of  this  figure  could  be  made  an 
important  part  of  the  Bank's  machinery  for  the  regulation  of  credit 
and  that  it  could  usefully  replace  some  open  market  operations, 
particularly  if  the  joint  stock  banks'  deposit  rate  were  made  more  elastic. 
But  these  arrangements  can  be  successful  only  if  the  joint  stock 
banks  are  taken  into  the  Bank's  confidence  and  plainly  informed 
of  its  current  credit  policy. 

The  main  object  of  these  larger  reserves  is  to  provide  the 
central  bank  with  adequate  resources  with  which  to  manage 
the  monetary  system.  With  the  same  object,  the  Committee 
further  suggests  that  the  Bank  of  England  should  consider  an 
appreciable  increase  in  the  amount  of  its  capital. 




Although  British  manufacturers  and  traders  have  always  been  able 
to  find  cheap  accommodation,  yet  the  relations  between  British  banks 
aud  industry  have  never  been  so  close  as  those  between  German  and 
American  banks  and  industry. 

In  Germany,  scarcity  of  capital  and  of  independent  investors 
compelled  the  banks  to  supply  industry  with  long-period  as  well  as 
short-period  capital.  These  responsibilities  obliged  them  to  keep  in 
intimate  touch  with  the  industries  themselves. 

In  France,  the  individual  investor  had  usually  relatively  small 
resources  and  relied  on  the  investments  suggested  to  him  by  the  big 
banks  which  made  practically  all  the  industrial  issues. 

In  the  United  States,  the  great  industries  and  railroads  were 
affiliated  to  particular  banking  houses  or  issuing  institutions  which 
usually  sponsor  all  industrial  issues  of  well-known  concerns  and,  in 
addition,  make  loans  to  investors  and  speculators  either  direct  or 
through  brokers. 

In  considering  the  most  beneficial  system  for  British  industry,  the 
Committee  states  that  progress  necessitates  closer  association 
through  appropriate  organisations  of  the  financial  and  industrial 

Financial  leaders,  through  their  wide  international  operations,  are 
competent  to  advise  not  only  on  home  conditions  but  also  on  affairs 
throughout  the  world.  Industry  is  becoming  more  internationalised  ; 
and  British  industry  must  be  ready  to  meet  American  and  German 
competitors  who  are  generally  financially  powerful  and  backed  by 
banking  and  financial  groups.  Without  similar  support,  British 
industry  will  undoubtedly  be  at  a  disadvantage,  particularly  in  the 
establishment  of  British  enterprises  abroad.  It  will,  therefore,  have 
to  keep  in  close  touch  with  institutions  connected  with  international 
finance.  Industries  and  financial  institutions  will  thus  have  to 
co-operate  so  that  each  is  thoroughly  intimate  with  the  affairs  and 
position  of  the  other. 


Particularly  in  the  matter  of  investment  have  our  financial  institu- 
tions been  weak.  Greater  attention  must  be  given  to  directing  our 
capital  into  domestic  enterprise  and  into  British-owned  concerns 
abroad.  Long  established  issuing  houses  assist  those  who  invest 
abroad  and  frequently  vouch  for  the  issues  they  sponsor  ;  but  with 
few  exceptions  little  guidance  is  forthcoming  in  respect  of  home  issues, 
and  many  ignorant  investors  are  misled  merely  by  the  appear- 
ance of  the  name  of  a  large  joint  stock  bank  on  a  prospectus. 

Though  industry  should  in  no  way  be  managed  by  the  banks, 
both  industry  and  finance  would  benefit  from  a  closer  relation- 
ship between  British  industry  and  the  City  of  London,  especially 
if  the  intrinsic  merit  of  industrial  issues  were  vouched  for  by  institutions 
<>f  first-class  strength  and  repute  specialising  in  the  finance  of  particular 
nulustries.  It  would  also  be  better  if  the  joint  stock  banks  did  not 
give  the  appearance  of  sponsoring  any  issues  for  which  they  could  not 



Every  industrial  and  financial  company  has  to  provide  itself  with  (a) 
permanent  capital  and  (b)  seasonal  or  temporary  credits.  Sometimes 
intermediate  credit  also  is  required. 

SHORT-TERM  CREDITS.  The  principal  function  of  the  banks  is  to 
provide  short-term  credit.  This  a  lucrative  source  of  business  and 
the  facilities  afforded  to  British  industry  in  this  respect  compare 
favourably  with  those  available  in  other  countries.  The  Committee 
concludes  that  "  our  banking  system  is  adequate  and  satisfactory  in  the 
provision  of  the  normal  short  credits  to  industry  and  their  distribution." 
In  this  connection,  however,  all  would  benefit  by  a  more  extended  use 
of  commercial  bills — bills  given  by  a  purchaser  to  a  supplier — rather 
than  mere  book  entries. 

INTERMEDIATE  CREDIT.  This  is  credit  advanced  (a)  for  periods  ranging 
from  one  or  two  up  to  five  years  and  is  required  for  hire  purchase  sales, 
in  which  the  ownership  of  goods  is  retained  by  the  seller  until  payment 
is  completed  ;  (b)  for  advances  against  deferred  payment,  in  which  owner- 
ship of  goods  passes  to  the  buyer  and  payment  is  spread  over  a  period  ; 
and  (c)  for  long  term  credit  contracts,  such  as  road  building  and 
harbour  construction. 

Excellent  facilities  exist  for  these  purposes  for  use  internally,  but  the 
trading  community  does  not  take  as  much  advantage  of  them  as  it 
might,  especially  in  the  first  two  groups. 

In  the  case  of  sales  and  contracts  abroad,  credit  facilities  are  not 
adequate  and  frequently  British  firms  have  to  resort  to  foreign  institu- 
tions. To  remedy  this  situation,  British  institutions  should  be 
established  for  the  purpose  of  assisting  British  industry  and 
trade  abroad.  Some  of  these  facilities  should  be  provided  by  the 
joint  stock  banks  and  other  existing  financial  institutions.  The  banks 
would  run  no  undue  risk  in  financing  longer  term  contracts  than  is  their 
custom,  provided  they  were  of  a  sound  character,  and  amounted  only 
to  a  small  proportion  of  their  advances. 

LONG-DATED      CAPITAL  :       PROPOSALS     FOR     A     NEW 

Closer  co-ordination  between  British  industry  and  the  City  of  London 
would  be  advantageous  for  the  provision  of  long-dated  capital,  especially 
for  large-scale  industry.  In  some  respects  the  City  has  better  facilities 
for  providing  capital  to  foreign  countries  than  to  British  industry,  and 
there  is  need  for  new  institutions  to  fulfil  the  following  functions  : 

(a)  To  act  as  financial  adviser  to  existing  companies  ; 

(b)  To  advise  as  to  the  provision  of  permanent  capital 

(c)  To      secure     the     underwriting      of      and      to      issue      the 
company's    securities    to   the    public    and,    if    necessary,    to 
assist  previously  in  arranging  for  temporary  finance  in  anticipa- 
tion of  an  issue  ; 

(d)  To  assist  in  financing  long-term  contracts  at  home  and  abroad, 
or  new  developments  of  an  existing  company,  and  to  found 
companies  for  new  enterprises  ; 

(e)  To  act  as  an  intermediary  and  financial  adviser  in  the  case  of 
mergers   or  in  the  case  of  negotiations  with  corresponding 
international  groups  ; 

(/)   To  be  free  to  carry  out  all  types  of  financing  business. 


Such  an  institution  must  have  a  substantial  capital.  When  financing 
contracts  for  periods  up  to  five  years,  it  might  be  able  to  supplement 
its  resources  by  the  issue  of  its  own  short-term  notes.  It  should  be 
able  to  rely  on  co-operation  with  existing  financial  institutions  in  making 
temporary  advances.  It  must  also  build  up  an  expert  staff,  establish 
gradual  connections  with  industry  and  instil  confidence  in  its  issuing 
ability  and  credit. 

Though  the  big  joint-stock  banks  could  perform  these  functions  it 
"  is  doubtful  whether  the  banks  can  with  advantage  depart  from 
their  traditional  banking  sphere."  The  same  difficulty  applies 
to  the  big  private  banking  houses.  Such  institutions  could,  however,  with 
no  change  in  their  present  banking  practice,  take  an  interest  in  the  share 
capital  of  an  institution  set  up  for  this  purpose.  "  The  best  course 
might  be  if  the  leading  private  institutions  and  the  big  banks 
were  to  co-operate  in  creating  one  or  more  such  concerns." 
The  Bankers'  Industrial  Development  Company,  at  present  an  offshoot 
of  the  Bank  of  England,  might  form  the  nucleus  of  a  new  institution 
on  the  lines  suggested,  but  it  should  at  a  convenient  stage  be  separated 
from  the  Bank  of  England  and  have  a  separate,  self-supporting  exist- 
ence. To  provide  financial  facilities  for  the  small  and  medium  sized 
concern  the  Committee  recognises  that  it  .nay  be  desirable  to  form 
yet  another  type  of  finance  institution  which  would  confine  itself  to 
smaller  industrial  and  commercial  issues. 


Information  and  statistical  knowledge  are  also  essential.  The 
provision  of  statistics  could  be  undertaken  by  the  appropriate  Ministries. 
In  particular  the  publication  of  the  following  statistics  in  new  or 
improved  form  is  recommended  :  the  monthly  returns  of  the  clearing 
banks  ;  classification  of  loans  and  overdrafts  ;  returns  from  the  other 
joint  stock  banks  and  other  banking  institutions  ;  foreign  balances 
and  foreign  liquid  assets  held  in  sterling  ;  the  volume  of  acceptances  ; 
the  volume  of  cheque  transactions  ;  the  balance  of  trade  ;  the  census  of 
production  ;  the  volume  of  wages  paid  ;  the  volume  of  retail  sales  ;  the  ag- 
gregate and  the  distribution  of  profits  ;  the  value  of  capital  construction. 

The  various  Government  Departments  responsible  for  the  prepara- 
tion of  statistics  should  co-operate  in  such  work. 


The  Report  was  signed  by  all  members  of  the  Committee  with  the 

exception  of  l.ord  Bradbury,  who  dissented.    Most  of  the  other  members 

u'.ol  Addenda  which  amplified  rather  than  disagreed  with  certain 

points  in  the  main  report.     The  chief  points  of  the  two  most  important 

of  these  Addenda  are  summarised  here. 


Signed  by  Sir  Thomas  Allen  and  Messrs.  Ernest  Bevin,  J.  M. 
Keynes,  R.  McKenna,  J.  Prater  Taylor,  A.  A.  G.  Tulloch. 

The  signatories  to  this  Addendum  recall  that  in  the  Main  Report 
it  is  recognised  that  the  remedies  for  the  world  depression  lie  in  an 
expansion  of  purchasing  power  ;  in  the  encouragement  of  borrowing 
if  necessary  under  guarantees;  in  a  reduction  in  the  cost  of  both  long- 
terra  and  short-term  credit ;  and  in  the  encouragement  of  enterprise 
and  investment. 


But  the  "  open  "  position  of  this  country  is  such  that  the  initiation 
of  independent  action  here,  without  concerted  action  abroad,  would 
subject  the  Bank  of  England  to  a  severe  strain,  to  meet  which  it  would 
be  necessary  for  us  to  strengthen  our  position  by  (a)  improving  our 
balance  of  trade  through  (i)  an  increase  of  exports,  (ii)  the  substitution 
of  home-produced  for  imported  goods,  and  (b)  increasing  investment 
at  home. 

Apart  from  the  basic  need  of  improving  the  relative  efficiency  of  our 
industries,  there  are  three  practical  courses  open  to  us  for  achieving 
these  objects  : — (a)  a  reduction  of  salaries  and  wages  ;  (b)  control 
of  imports  and  aids  to  exports  ;  (c)  State  assisted  schemes  of  capital 


While  recognising  the  urgent  need  for  greater  elasticity  of  money- 
incomes  and  the  fact  that  an  all-round  reduction  would  be  beneficial, 
the  signatories  emphatically  reject  the  suggestion  that  a  reduction 
of  salaries  and  wages  alone  would  offer  a  solution.  Such  a 
policy  would  tend  to  cause  further  falls  in  prices  and  would  render 
capital  charges  and  taxation  a  greater  real  burden  ;  while  it  would 
inevitably  defeat  its  own  object  by  causing  similar  reductions  in  other 

But  if  an  all-round  reduction  in  money-incomes  becomes  plainly 
unavoidable,  it  may  be  attained  by  : — 

(a)  Devaluation — a  policy  rejected  in  the  Main  Report. 

(b)  A  National  Treaty  for  a  simultaneous  cut — a  scheme  which 
has  many  practical  difficulties,  but  which  should  nevertheless 
receive  consideration  as  a  possible  alternative. 

(c)  Tariffs  plus  Bounties — which  would  have  the  twofold  effect 
of   reducing   money-incomes   and  improving   our   balance   of 


The  signatories  give  their  strongest  support  to  the  third  method, 
which  they  consider  would  be  attended  by  the  advantages  but  not  by 
the  practical  difficulties  of  the  two  others.  They  justify  the  abandon- 
ment of  the  policy  of  Free  Trade  on  the  ground  that  the  economic 
position  of  this  country  is  in  a  state  of  chronic  disequilibrium,  and  they 
argue  that  the  suggested  policy  would  bring  in  a  useful  contribution 
to  the  National  Exchequer.  Hence,  in  the  present  circumstances,  this 
is  regarded  as  the  most  practical  plan  of  action  likely  to  revive 
business  confidence. 


In  conjunction  with  a  system  of  tariffs  plus  bounties,  the  signatories 
recommend  the  development  of  state  enterprise  with  subsidies  for 
domestic  investment.  In  particular,  the  following  schemes  are 
suggested  : — (a)  Rebuilding  and  re-planning  schemes  for  larger  towns 
and  industrial  centres ;  (b)  Refitting  of  our  staple  industries  on 
modern  lines;  (c)  Electrification  of  the  railways  as  suggested  by 
the  recent  Weir  Commission. 

It  is  pointed  out  that  there  is  no  danger  that  such  State-directed 
schemes  will  result  in  a  transference  of  private  investment  since  there 
is,  at  the  moment,  no  lack  of  funds  available  for  investment  :  rather 
there  is  a  lack  of  confidence  in  borrowers.  Above  all  it  is  considered 
desirable  that  capital  development  should  be  organised  and 


planned  on  a  national  scale  through  a  Board  of  National  Invest- 
ment charged  with  "  the  deliberate  guidance  of  schemes  of  long-term 
national  investment  ". 

In  conclusion  it  is  emphasized  that  these  proposals  are  made  not  as  an 
alternative  to  the  main  suggestion  of  raising  world  prices  but  rather 
as  an  "  attempt  to  avoid  the  immense  waste  of  the  national  productive 
resources  "  pending  the  necessary  upward  adjustment. 

The  signatories  point  out  that  those  who  dissent  from  these  views 
contend  that  the  proposals  put  forward  are  merely  temporary  shifts 
which  do  not  get  to  the  root  of  the  trouble,  viz.,  the  unduly  high  level  of 
our  costs  of  production  as  compared  with  those  of  our  competitors 
(see  Addendum  III).  Nevertheless,  the  signatories,  pinning  their 
faith  on  the  ultimate  recovery  of  world  prices,  maintain  that  we  can 
continue  to  support  permanently  our  improved  working  class  standards, 
and  that  to  seek  the  remedy  in  a  reduction  of  salaries  and  wages  will 
involve  practical  difficulties  and  social  troubles  of  the  first  magnitude. 


Signed  by  Prof.  T.  E.  Gregory. 

Whilst  admitting  that  the  great  problem  to  be  faced  is  the  disequili- 
brium between  prices  and  costs,  Prof.  Gregory  points  out  that  the 
problem  cannot  be  solved  except  by  co-operation  between  all 
countries  :  consequently  any  attempt  to  achieve  economic  isolation 
of  this  country  by  the  imposition  of  tariffs  is  to  be  deplored  as  incom- 
patible with  the  attainment  of  international  co-operation. 

The  Two  Proposed  Remedies  should  be  combined. 

Two  remedies  are  available  :  to  raise  prices  or  to  reduce  costs. 
Each  is  open  to  certain  objections  which  Prof.  Gregory  considers  could 
best  be  met  by  combining  the  two,  i.e.,  by  raising  prices  and  reducing 
costs.  In  this  way  the  tendency  for  a  reduction  in  costs  to  produce  a 
further  reduction  in  prices  would  be  counteracted.  He  points  out,  also, 
that  a  reduction  in  costs  need  not  cause  a  proportionate  contraction 
in  consumers'  purchasing-power,  since  the  effect  is  merely  to  redistribute 
the  proceeds  of  industry,  more  going  to  the  entrepreneur  and  less  to 
the  wage-earner.  Furthermore,  the  reduction  in  unemployment  will 
itself  increase  the  volume  of  purchasing  power  ;  and  the  growth  in 
profits  will  stimulate  business  expansion. 

Objections  to  Tariffs  and  Capital  Schemes. 

Prof.  Gregory  is  in  complete  agreement  with  the  signatories  of 
Addendum  1  regarding  devaluation  but  he  differs  from  them  funda- 
mentally on  the  question  of  tariffs,  which,  he  considers,  would  tend 
to  make  permanent  the  present  disequilibrium  between  British 
and  foreign  costs.  He  points  out,  too,  the  danger  that  any  tem- 
porary expedient  might  easily  become  a  permanent  part  of  our 
» i  onomic  policy.  He  argues  that,  if  imports  were  reduced  and  foreign 
tmcnt  were  not  adjusted  to  the  changes  in  the  balance  of  payments, 
gold  would  flow  in.  This  gold  would  be  used  to  expand  credit  and  a 
resulting  boom  in  home  industry  would  check  foreign  investment. 
The  money  income  of  society,  especially  money  wages,  would  increase. 
This  would  act  as  a  stimulus  to  imports  and  a  check  on  exports,  while  a 


new  disequilibrium  between  home  and  foreign  costs  would  be  estab- 
lished. Thus,  to  prevent  a  collapse,  a  higher  level  of  tariffs  would 
be  necessary. 

As  regards  the  effectiveness  of  tariffs,  he  emphasises  the  fact  that  there 
would  probably  be  vigorous  attempts  abroad  to  neutralise  our  tariffs 
and  subsidy  policy  by  anti-dumping  measures.  In  any  case  the  foreign 
goods  which  were  shut  out  of  British  markets  would  probably  appear 
in  neutral  markets  where  they  would  compete  with  our  exports. 
Finally,  he  doubts  whether  the  revenue  from  any  such  scheme  (after 
deduction  of  administrative  expenses  and  subsidies)  would  be  sufficient 
to  make  the  policy  worth  while. 

The  proposals  for  capital  development,  he  considers,  fail  to  meet  the 
needs  of  the  situation  since  they  would  not  greatly  affect  the  position 
of  our  export  industries,  which  contribute  most  to  unemployment. 

The  best  solution  is  a  reduction  of  money  costs. 

Prof.  Gregory  suggests  that  the  best  solution  put  forward  is  the 
reduction  of  money-costs.  He  suggests  that  this  should  be  effected 
as  far  as  possible  by  improved  methods  and  by  spreading  overhead 
costs  over  a  larger  output.  To  facilitate  this  process  rationalisation 
schemes  may  be  found  necessary  and  here  it  may  be  desirable  to  invest 
the  State  with  statutory  powers.  He  does  not  agree,  however,  that  it 
is  possible,  or  even  desirable,  to  effect  an  all-round  reduction  of  incomes 
on  the  lines  of  a  National  Treaty.  The  shareholding  class  already 
suffers  by  reduced  dividends  and  capital  reductions  and  the  rentier 
by  increased  taxation.  Thus  the  main  burden  of  the  reduction 
must  fall  on  wage-earners.  The  fall  need  not  necessarily  be  confined 
to  the  exporting  industries,  but  might  extend  to  ancillary  and  sheltered 
trades.  In  any  case  the  fall  need  not  involve  an  equal  reduction  in 
the  standard  of  living  and,  to  the  extent  that  it  makes  possible  an 
increase  of  productivity,  it  should  result  eventually  in  a  betterment 
of  the  standard. 

In  brief,  Professor  Gregory  contends  that  the  tariff  action,  strongly 
recommended  by  Mr.  McKenna,  Mr.  Keynes  and  the  others,  is  merely 
a  roundabout  and  possibly  ineffective  way  of  bringing  into  effect  that 
reduction  of  costs  which  in  his  opinion  is  clearly  imperative. 

ALL  3  FIRST  PLACES  won  by  M.C.  Students 
on  Two  Occasions. 

At   both  the    May,    1931,    and    the    November,    1927,    S.A.A. 

examinations,  the  Metropolitan  College  presented  the  winners 

of  the  three 

1st  PLACES,  i.e.  Prelim.,  Inter,  and  Final. 

The  Metropolitan  College  has  thus  achieved  on  two  occasions, 
a  record  which  cannot  be  equalled  by  any  other  Coaching 


Won  by  M.C.  Students  in  1930-31 

At  the  examinations  of  the  Institute  of  Chartered  Accountants  in 

England  and  Wales  and  the  Society  of  Incorporated  Accountants 

and   Auditors,   held  in   1930-31,  Students  of  the  Metropolitan 

College  won  : 

8  other  Honours  —  C.A.  &  S.A.A. 
and  540  SUCCESSES 

During  the  9  years  to  May,    1931,   English  C.A.   and   S.A.A. 
Students  of  the  College  have  won  : 

103  HONOURS  and  over  3,700  PASSES 


21  FIRST  PLACES  in   the  KINGDOM 

A  copy  of  the  College  "  Accountancy  Prospectus,"  and  full  par- 
ticulars of  the  expert  postal  and  oral  training  facilities  provided, 
may  be  obtained  on  application  to  the  Secretary  : 



Printed  l>y  \YniiTiow  mid  S,,ns  Litmtrd.  London,  I)mi-.i:i!'ir  :iml  \Vutfonl. 
tor  the  Publishers.  The  Metropolitan  College  Ltd.,  St.  AIL 

A  31120. 

HG  Thomas,  Samuel  Evelyn 

186  The  Macmillan  report